State tax income increase retroactive to Jan. 1; Withholding will make up the difference [Waterbury Republican-American]

Waterbury Republican-American
Story as it appeared in the Waterbury Republican-American on May 19, 2011

When Gov. Dannel P. Malloy signed the new state budget into law earlier this month, income taxes for many state residents went up — in January.

While the state’s fiscal year doesn’t begin until July 1 and the new tax rates don’t take effect until Aug. 1, the budget appropriations law makes the increases retroactive to Jan. 1. Kevin B. Sullivan, commissioner of the state Department of Revenue Services, said that is typical because the tax year begins on the first of the year.

The retroactive tax means a majority of taxpayers have not had enough withheld from their paychecks over the first five-plus months of the year to cover the higher rates and will need to have more withheld through the end of the year to make up the difference.

The state on Wednesday released new interim tax tables, showing just how much more you’ll need to have withheld from your paycheck to make up for what hasn’t been set aside.

Releasing the tables now gives individual taxpayers and employers a chance to make adjustments before Aug. 1, Sullivan said.

“The sooner people can start to have their withholding adjusted, the easier it is not to face a crunch at the end of the year,” he said. “People always have the ability to adjust their withholding by going to their employer and asking to take a different amount out. So if they want to get a head start on this, they can do that. I suspect some people have started that already. You don’t need to wait.”

Even if you do nothing, your employer or your employer’s payroll company will eventually make the adjustment for you, he said.

“It will kick in whether people change it or not,” Sullivan said.

The tables have been posted on the department’s website, http://www.ct.gov/drs, and will also be sent directly to major payroll processing companies, he said. The department also plans in the coming weeks to release an informational publication describing the income tax changes, he added.

When Malloy signed the new budget on May 4, Sullivan committed to having the revised tax tables distributed by the end of the month, “so I beat my goal,” he said.

“Four weeks ago, I assembled a team and divvied up what we knew to be the tax changes,” he said. “Obviously, some of those will be changing before the legislature is adjourned. But we have a working group and there is not a new tax or revised tax that has not been identified.”

The changes made to the state’s income tax include expanding the tax brackets from three to six — 3 percent, 5 percent, 5.5 percent, 6 percent, 6.5 percent and 6.7 percent. The department said the new calculations phase out the 3 percent rate for taxpayers at certain Connecticut adjusted gross income levels: over $100,500 if filing jointly; over $56,500 if filing single; over $78,500 if filing as head of household, and over $50,250 if married and filing separately,

The income excluded from the 3 percent rate will be taxed at the higher 5 percent rate, officials said.

Bonnie Stewart, vice president of government affairs for the Connecticut Business and Industry Association, said many taxpayers may not realize that the revised tax tables now include a “cliff.”

“What a lot of people don’t realize about the Connecticut income tax is it’s graduated,” she said. “That hasn’t changed. But the thing that’s a little different about this legislation is how it affects people in the top bracket. … Once you earn $800,000, you go back to that very first dollar you earned and pay taxes on it at the higher rate.”

That’s significant, Stewart said, because many small businesses are LLCs or S-Corporations, which means the owner’s personal income tax return is also the company’s tax filing.

“For any smaller or mid-sized companies that weren’t counting on extra income, getting unexpected income — say from a larger-than-expected order or higher demand than expected for a product — in the last quarter of the year will mean they have to go back and figure out how to modify their withholding,” she said. “It could be extremely problematic in a way that retroactivity has not been before,” because a business owner may face an unexpectedly large tax bill.

“The bulk of manufacturers are S Corporations,” Stewart said. “Any of those guys would get snagged there.”

Sullivan said his department is still working to determine how to both apply and enforce the variety of changes enacted to state tax laws by the legislature this year, including the myriad changes to the state sales tax and the imposition of a tax on Internet retailers like Amazon.

“It’s a large order,” he said. “It may be the largest single set of changes in one period that this agency has dealt with in a long time.”